New Approach of Trading Area Definition Ákos K
OZÁK, László K
ÁRPÁTI, András K
OVÁCSBudapest Business School, Faculty of Commerce, Catering and Tourism, Budapest, Hungary
DOI: 10.18427/iri-2019-0004
Definitions and interpretations of socio-economic spaces has dramatically changed in the last decades. Beyond the classic physical, geographical spaces (regions), nowadays new space-discussions got in the focus of scientific research. Cyber space (internet), personal space-sensing (mental spaces and maps) and their relations to geographical space expanded the term of socio-economic space. This „space revolution” altered the methods and tools of retail and sales planning, too.
The method of sales planning to start up retailers mainly covers the question of how to make trade forecasts by using competitors’ data. There are some well-known methods, of this are that of planning on the basis of trade in goods, volume or price projections. Authors modified the HUFF model to calculate the potential attraction area of a new business in the existing fabric of retailers’ set in a defined space of potential consumers.
Based on the modified HUFF model, a decision-making SHOP model was developed assisting the potential investors of a retail unit by calculation of cash-flow in the existing consumer-defined space parallel with other – existing – retail units. This SHOP model approach makes decision-making more reliable against the calculations where neighbour-effects are not taken - fully - into account.
Both theoretical foundation and practical application of the two decision- making models are disclosed that gives an insight of an entrepreneur in the applicability of this spatial planning approach elaborated by the authors.
New Approach of Trading Area Definition
The aim of our paper is to reconsider some more important issues in the field of retail location analysis, modelling and financial planning. First we introduce the post-modern narrative of spaces in connection to retailing. We will give an overview on geographical, and non-geographical spaces (e. g.
cyber space, networks, personal space-narratives) and we will point-out the importance of these new space narratives in retail location seeking. After having a comprehensive picture on retail spaces, we will introduce the results of a case study that was conducted in three postcode districts of Budapest 5th and 6th district. In the case study two modelling methods were
applied. First we used a modified Huff’s model to determine a theoretical zone of attraction for a new food store in the modelling area. Based on the results of the modified Huff’s model we elaborated a decision-making (SHOP) model for cash-flow optimalisation in the pre-defined trade area.
With our findings we would like to support the long-term, strategical decision making process of SME retailers in the search for optimal retail spaces.
Space revolution and retail places in transition
Retail spaces has dramatically changed in the last two decades. Till the end of the previous millennium optimal site location seeking was considered only in geographical space. Although geographical issues (such as distances, spatial distributions, patterns) are still important in the search for optimal retail places, nowadays “new spaces” occurred in locational theories. These spaces are the followings:
1. External spaces (absolutistic (geographical) space) 2. Internal spaces (relationist spaces)
3. Lived spaces (constructionist space-narratives, subjective space- sense)
4. Virtual spaces (online spaces)
5. Hybrid spaces (fusion of geographical and online spaces)
The deeper understanding of these non-trivial space-interpretations or narratives will help us to have an optimal retail location under the new socio-economic circumstances of these days. Different authors put more or less stress on the importance of one selected space-narrative but they agree that different approaches are needed to understand the colorful nature of socio-economic and geographical space (Nemes Nagy, 2014; Faragó, 2012;
Benedek, 2002; Varró, 2018). In the following sections we will introduces the above mentioned five space-interpretations using some actual retail- related examples.
External (geographical) spaces are the best known (maybe trivial) spaces where there are 3D-objects and physical distances among them. This is the world where we live in and where economy and society exist. This geographical basis is where companies, also retail units must operate and the characteristics of these geographical environment influence the performance of companies. The size and distribution of population, characteristics of road network, place of competitors, closeness of transport hubs, etc. has considerable impact on our retail unit. In our approach this
“classic” space-narrative is the most important, in our models this space- narrative is built-in, but before we focus only on this geography-based concept, we would like to add some novel narratives that may enhance our space-sensitivity.
Internal spaces are ones in that not geographical distances (farness or closeness) is important (e. g. in meter) but the so-called network proximity.
Here we analyze networks of similar entities. In retail research internal spaces are formed by different stores of one retailer, competitor networks of retailers in the same branch, network of shoppers in one store, etc. These internal (network) spaces can be analyzed primarily not with geographical but with mathematical methods.
Lived space theory comes from the post-modern geography. The concept roots in Lefebvre and Soja’s constructionist theory on spaces. (Soja, 1989;
Berki, 2015) In retailing discussions on constructed spaces may occur by the internal design of large area shopping centers: How do different groups of visitors and customers “use” the space of the shopping center, how they move, rest, shop in the space.
Virtual spaces have been becoming more and more important these days due to e-commerce and m-commerce revolution. Not only e-shops, but the whole e-business process transforms the “traditional” retailing and retail spaces. Although in Hungary only 5% of the total retail turnover comes from e-commerce, but this ratio has been increasing rapidly. In the near future e-commerce must be taken into consideration by all kind of retail investments (not only by online but also by offline retail projects too).
Hybrid spaces are those where physical (geographical) and online (virtual) spaces meet and get in touch with each other. In retail trade two main considerations of hybrid spaces can be identified: the geographical dimension (boundaries) of e-commerce and the AR-based (augmented reality) solutions are the typical examples for hybrid spaces. In several retail sectors (e. g. FMCG) the characteristics of the distributed products (fresh food) delimit the territory of e-commerce activity (that has no limit theoretically). It means that the online retail activity influences the provided services in geographical space. In Hungary FMCG-retailers’ services can be reached only in larger towns and cities. Augmented Reality software solutions give digital ad-ons for the geographical spaces: we can design home interiors with thee help of our tabs or mobiles. Several retailers (e. g.
IKEA) has already developed its own AR-software.
Trade in location theory
Location theories typically cover the operational and spatial analysis of agricultural or industrial units. Economic operators are trying to find an optimal location by business calculations, and the recognition and conscious examination of thereof was a great step in the development of location theories. The circle of measurable (calculable) economic factors gradually broadened, and the un-measurable characteristics came into prominence as well, but trade appeared in the development stages of location theories as no independent economic area for a long time. The spatial dimensions of the goods-producing economy (specialization, division of labor), the mass transportation of raw materials and finished products (transport infrastructure, transportation equipments), and the free movement of capital and workforce are all general requirements of economic activities
(Rechnitzer et al., 1999). The agricultural location theories (first third of the 19th century) covered explanations on the spatial localization of the agricultural production, the sites, and the related connections; while the industrial location theories (first decades of the 20th century) covered explanations on the installation locations of industrial plants. The analysis of trade opportunities appeared first in examinations performed between the two World Wars (e.g. Lösch), and out of the factors for selecting a site they put the maximization of income into prominence, and instead of production they took the characteristics of consumption into account. By the optimization of informatics-based, i. e. mathematical models (e.g.
Isard) – formed by considering all the factors needed for the determination of installation location – developed in the second half of the 20th century such functions in trade were supported as, for example, the territory management. Today location theories take such non-economic motivations and non-measurable factors (e.g. the influence of individual experience) into consideration that can be utilized by trade enterprises in their decisions about selecting a site.
Competitiveness relationship between the trade enterprise and the operating location
In the traditional approach company advantages are determined by the macro-economic conditions on the one hand, and the effectiveness of company operation accompanied by the refinement of the company's strategy on the other hand. The experience of the past years shed light on the fact that – especially in the case of trade enterprises – on the long term, the quality of the local business environment, and the level of regional and local economy development determine the competitive advantages of the enterprise and the operating environment. I present the sources of the competitive advantages of trade enterprises, namely the identification of site selection factors by Porter's diamond model. Porter named four interrelated determinants (Lengyel, 2010).
The analysis of trade factors gives essential information for determining and planning the purchase power of the operational region. The purchase power of the settlement and the catchment area depends on the population's size and disposable income per unit. Besides the level of the local demand, its composition and the segmentation of its structure are also important factors in examining and forecasting consumer needs. It is important to recognize what economical, technological and social factors the change and measure of increase in demand depends on. Through their purchases consumers from other regions (e.g. abroad) may directly contribute to the economic development of the region by the so-called multiplier effect. The income spent this way increases the profit of the trader, which means more tax revenue and maybe an increase in the level of employment.
The basis of calculations of a new store's expected sales is the estimation of expected purchase power, which requires the determination of the catchment area. Determining the operational region is one of the most complex dimensions of business development, because besides even the most sophisticated mathematical and statistical methods the experiences of leaders and experts are not negligible, so these subjective elements are incorporated into the decision-making process. For example, the borders of market zones are determined by travel time, and besides divisional standards the trader's experience and local knowledge is also required for the identification of primary, secondary and tertiary zones based on the consideration of travel times in minutes as well as for the calculations of the number of consumers per zone. The catchment area is often determined by more than one methods used concurrently. One of the most common methods is the control or additional calculations based on Reilly's gravity model. This is a geographical model that describes the flow of people between two settlements and based on geographical location it can be examined that which of the competing stores will be preferred by the consumer. The model considers both the population of the examined settlements and the distance between them, and so the designation of several settlements makes it possible to outline the theoretical borders of the catchment area.
It should be kept in mind that the mathematical method used for the estimation of purchase power in the catchment area can be sophisticated as it is, in the decision-making process no correctional factors like the store type, the selection of goods, the traffic and the competitors' location should be ignored. The decision about the spatial position has aspects like how centrally the store is located, and how much the cost of the property or the rental fee will be. Choosing an appropriate property development strategy is influenced by the store type too, because it is not the same if the trader opens a “lonely shop” or a shop in a planned trade zone. So the property and business development strategies are influenced on middle and long term by how elaborated the local urban development conceptions are.
Location strategy for new entrants
The saying “never manage alone” prevails markedly in trade, because in this sector it is especially true that networks and strategic partnerships are competing each other instead of “lonely” companies. The success of the trader depends on the quality of his or her relationship with the suppliers, and because the suppliers are parts of the supply chain system, the prices and quality of goods depend on the level and reliability of the partnership.
The operators in related industries are not competitors, but they may be useful, for example the logistics providers have influence upon the transaction costs of the distribution channel, and consequently on the competitiveness of the trader as well.
Many a time a multinational corporation appearing in the region formulates the sustainability expectations determining the supply chain too.
The system of BGE SHOP is a good example of this. The chain store defined such requirements for its suppliers that may affect the site selection; for example BGE SHOP defines standards on environment protection and working conditions.
Site selection is basically influenced by what store type the entrepreneur would like to open his or her shop in. Hypermarkets, supermarkets and shopping centrals are typically built in agglomeration areas and on properties nearby cities – the basic reason is the cost of operation and property development, but in the same time building up an infrastructure (e.g. roads and public utilities) may mean additional burden that should be considered. Opening a new store with big floor space in downtown may be profitable if travelling time is not to long for potential shoppers (Table 1).
Table 1. Estimated travel time among shops (in minutes)
Zone Culinaris Spar I. Csem 'n' Go ALDI Spar II. BGE new shop
Culinaris 0 5 5 5 8 5
Spar I. 5 0 5 5 7 5
Csem 'n' Go 5 5 0 5 3 5
ALDI 6 5 5 0 8 5
Spar II. 5 5 5 8 0 5
BGE new shop 5 5 5 5 0 5
A new store's effect on the local market opportunities is important because in favor of decreasing the logistics costs suppliers tend to offer the cheap products of local growers and manufacturers, and so they ensure a market for goods produced locally. If the local suppliers represent considerable weight in the supply of goods, then that has a benevolent effect on the region's GDP changes through the activity of the local economy.
In the related, non-competitor cooperation a new operator's provider function may cover both an introduction of and a demand for the work of various local small enterprises, thus it creates market for the local provider SME sector. The level of supplier partnerships is also a factor in site selection, so it is important for the quality and cost-benefit ratio of goods in the supply chain to ensure a competitive service.
Figure 1. Shop coverage in fifth districts
It seems unique that all the countless concepts on revitalizing the downtown and the city central(s) failed (1 figure). Besides the issues detailed above the opening of a new shop brings the need for an examination of the market position of the already operating enterprises in the region or settlement. Although the consumer goods retail trade is one of the industries showing the economically cleanest market competition situation, the economic policy always aims to bring one or the other store type into better position by “more or less delicate methods”. The real professional considerations are often lost in the communication campaigns.
We know the “big fish eats little fish” type of messages well enough, and objective observations rarely come out of the workshops. It would be interesting to examine how the audit methods tested on other areas of economy would work in the case of this trade industry. The Herfindahl- Hirschman Index (HHI) would be a useful method as the indicator of the market concentration in the region. The HHI is commonly used by oversight bodies of the state (for example, in communications and logistics) to find if the market situation is in danger.
With Huff's Gravity Model the expected distribution of purchase is determined by the floor space of the market centrals and the travel times it takes to reach them (table 1).
Table 2. Forecasted sales figures before and after new shop opening
Shop name Floor area (m2)
Estimated purchase power 1. (in th forint)
Estimated
purchase power 2.
(in th forint)
Culinaris 600 977 351 875 530
Spar I. 200 325 784 420 254
Csem 'n' Go 100 162 892 145 922
ALDI 1000 1 628 919 1 459 217
Spar II. 800 1 303 135 656 648
BGE new shop 400 840 509
4 398 080 4 398 080
By this we can model the degrees of market presence. In the case of opening a new shop the proper estimation of changes in the market share values can be critical in forecasting the changes in the sales of the region (Levy-Weitz, 2009). In terms of the floor space and travel time assumptions the estimated sales potential for new BGE shop: HUF 840 M.
The estimation of sales in connection with the new shop to be opened can be treated as potential one. With appropriate application of marketing principles (and a little luck) this potential sales value can be increased - and vice versa – neglecting those principles the potential sales will not be achieved, at least in the starting time period(s). With the assistance of the SHOP software those calculations can be made, and especially if the input values are supported by a market research, calculation for the future sales of the new shop can be considered as more realistic. In this way the sales estimation by the modified HUFF model and further calculation by the SHOP software would strengthen the opportunity of a more realistic decision- making in connection with the new shop to be opened in the fabric of existing shops at the location.
Acknowledgement: This research was supported by the Scientific Fund of Budapest Business School
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